How To Snowball Debt (Or Avalanche Or Snowpocalypse Debt)

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Are you familiar with how to snowball debt? How about avalanche debt? Or snowpocalypse debt? The first 2 are fairly common options for getting out of debt, while the third option is my own creation. Below are both the snowball debt method and the avalanche method for getting out of debt. Which one is right for you?

Snowball Debt Method

The snowball debt method of getting out of debt is fairly straightforward. You simply write down all of your various sources of debt and their balances. From there, you rank each debt in order of lowest balance to highest. If we have the following debts…

…when we list them using the snowball debt method, our debt list looks like this:

As you can see, Credit Card #2 has the lowest balance at $300. We will focus on paying off each of these debts as outlined in the chart above: Credit Card #2, Credit Card #1, Auto Loan, Personal Loan. But how do we allocate payments?

Allocation Of Payments With The Snowball Debt Method

After you complete your budget (if you need help with your budget, read this post) you will know how much money you can safely afford to put towards your debt each month.

A quick tangent here: Many of you know I was in debt. One of the mistakes I made when I first started to try to get out of debt was to put every last cent I had towards debt. I stopped going out and no longer hung with my friends. At first, this was easy. But things quickly changed. I began to hate my debt more and even resent it. Don’t put everything you have towards debt. Keep some money for going out and having fun. I know you want to get out of debt as soon as possible. By following the snowball debt or the avalanche debt methods you will. But trying to do too much is only going to end badly. Take it from someone who has been there before.

OK, back to how much you can afford. Let’s say you have $350 per month that you can easily use to pay off debt. You will pay the minimum payment for all of your debts except for Credit Card #2, the first debt on your snowball debt list. Whatever you have left of the $350 after making the minimum payment on your other debts is what goes towards this debt. Let’s see this in action:

As you can see, we made the minimum payments for all of our debts except for the first one. We took the remainder of the $350 and put it towards the first debt, $110 in this case.

Progressing With The Snowball Debt Method

You will continue to follow the above until you pay off your smallest debt. Once this happens, you then continue the cycle, only this time you make the large monthly payment to the new lowest balance debt. Here is how this looks:

The key here is to keep paying $350 each month on your debt. Your payments “snowball” because you begin to pay more and more on the larger debt balances as you knock out the smaller debts. Here is how the process looks as you move along:

Snowball debt method with 2 debts left:

Snowball debt method with 1 debt left:

(Note that your balances will be dropping during this time, I just left them alone so you can focus on how to allocate your payments through the snowball debt process.)

Why The Snowball Debt Method Works

Since most of us want to see results immediately, the snowball debt method keeps you motivated to get out of debt. This is because you quickly see results. When you pay off the smallest debt first, you will see progress in the form of one less debt in a fairly short amount of time. This motivates people to keep going.

But it doesn’t stop there. The motivation continues because the debts are wiped away at a faster pace because you keep paying off the smallest remaining balance along with a higher payment.

The Downside To The Snowball Debt Method

There is one downside to the snowball debt method: over the course of getting out of debt, you will pay more in interest than you otherwise would. This is because chances are you aren’t paying off the highest interest rate debt first, you are paying off the smallest balance first. With this said, it’s not the end of the world and I will explain why at the end of this post. In the meantime, what do you do if you want to pay the least amount of interest possible? Easy, you use the avalanche debt method. Here is how it works.

The Avalanche Debt Method

The avalanche debt method is very similar to the snowball debt method. The only difference is that instead of ordering your debts from smallest balance to largest, you order them from highest interest rate to lowest. Here is how this looks:

You follow the same payment structure as before. You pay the minimum on all of your debt except for the first debt listed, the one with the highest interest rate. Once you pay off that debt, you focus your attention on the debt with the next highest interest rate (Personal Loan) by making as large of a monthly payment as you can while still keeping the same amount going towards debt ($350).

You follow this process until your debts are all paid off.

Why The Avalanche Debt Method Works

The avalanche debt method works because you save the most in interest charges during the process of paying off your debts. Since you are paying off the highest interest rate debt first, it doesn’t have the chance to sit there and accrue more interest like the snowball debt method may. This is why the avalanche debt method works.

The Downside To the Avalanche Debt Method

The downside to this method is that it will take you longer to pay off some of your debts. If you look back at the chart above, you see that the personal loan is your second debt you will be paying off. It is also the debt with the highest balance. This means you will be paying off this debt for quite some time. This may frustrate some people and cause them to give up because they aren’t seeing progress (as in getting rid of debt accounts like in the snowball debt method).

The Snowpacolypse Debt Method

I’m not sure if I am the first to coin this term for the method below, but a quick search didn’t yield any results, so I think I am the first! The snowpacolypse debt method is really a combination of the snowball debt and the avalanche debt methods above. The overall goal is to save on interest payments while still getting out of debt at a reasonable pace. Here is how it works.

Step 1: Take advantage of balance transfers on your credit cards. You want to make sure you complete a balance transfer on a card that doesn’t have a balance. Also, make sure you understand the terms and conditions of the balance transfer. You want to make sure you know how long the interest rate is locked for, what the interest rate is, and how much the balance transfer fee is.

Ideally, you want the term (time the interest rate is locked) to be as long as possible. Try to get at least a year to 18 months, an interest rate of 0-2% and a fee of under 3%.

Step 2: Once you find this deal, transfer your highest interest rate debt to this card, or as much of it as you can. If you have 2 cards with no balance and can get a good offer for a balance transfer on both, repeat the above and move the remainder of your highest interest debt or your next highest.

Step 3: On any credit card debt that is left, call the company and ask for a lower interest rate. If you have been a good customer (paying on time, not missing payments) they should lower it for you. But watch out. They may try to offer you a low interest rate for 6 months on new purchases. That does you no good. You want a lower interest rate on your current balance. Try to get the interest rate under 10%.

Step 4: Organize your debts by listing your highest interest rate debt first. Next, list your balance transfer or temporary interest rate reductions by date of the expiring deal. You want the one that expires soonest at the top. After this, list out your remaining debt based on highest interest rate. Here is how this would look:

Step 5: Now comes a little more work. Look at your chart and see what you minimum payment would be on the first debt and then see how much debt you have. What you are looking for is how long it will take to pay off that debt. For example, let’s say you have a debt that has a 15% interest rate and a balance of $10,000. Your balance transfer is 0% for 12 months and then resets to 18%.

Just by looking, you should see that that you can’t pay off the $10,000 debt in 12 months. Because of this, you are better off placing the balance transfer debt first, then the $10,000 second. Here is how this looks in our situation:

In our case, we had to put the balance transfer first, just like I described above.

Step 6: From here, the steps are the same as in the snowball debt and the avalanche debt methods. You will pay the minimum on everything but the first debt and whatever is left over, $165 in our example, to the first debt.

Why The Snowpacolypse Debt Method Works

This method works because you are saving interest over the long run and ideally, you are getting out of debt quickly as well. You save money by taking advantage of balance transfers or lower interest rates, and then save more by paying the highest interest debt first. It’s a win-win.

The Downside To The Snowpacolypse Debt Method

The downside to this method is that it is a good amount of work. You have to research balance transfer deals, transfer balances, call for lower interest rates, sort out your debts, then re-sort, then begin paying. Because of this, I recommend most people try one of the other two methods instead.

Which Method Should You Use?

Now comes the time when you need to decide which method you should use. Unfortunately, there isn’t just one clear cut winner. It all depends on you and your motivations. Some may argue that the avalanche method is the only way to go because you are saving the most interest. While this is true from a purely finance point of view, that doesn’t make it right. The end goal is the same for everyone: to get out of debt once and for all.

Because of this, you have to choose the method that is the easiest for you to follow and that you will stick to, regardless is it takes more or less time to get out of debt or if you pay more or less interest. Remember what your true goal is. Anything else – interest savings or quicker payoff are bonuses to the goal. In other words, they are icing to your debt free cake.

Resources To Help With Getting Out Of Debt

At this point, you should be feeling fairly motivated to attack your debt. Before you run off and get to work, I have some resources to help you along the way. They are in no particular order:

Get Out Of Debt Quicker: If you are looking to cut the time to being debt free, there are some options for you. First, make sure you put any windfalls you earn towards your debt. This includes tax refunds, bonuses at work, birthday money, etc. Anything extra you can put towards your debt will speed up the process.

Motivation: If you ever need motivation in your debt payoff journey (and you most likely will), I encourage you to look at my Debt Payoff All Stars page. There I list other personal finance bloggers who have paid off a boatload of debt. The goal isn’t to be at the top of the list, but to identify with someone who has as much debt as you or more and get inspiration that you too can pay off your debt.

Ready For Zero:Ready For Zero is a free debt planning service. You create a free account, list your debts (or link to them in the portal), enter how much you can put towards your debt each month, and Ready For Zero creates a customized debt payoff plan just for you. If this service were around when I was in debt, I would have jumped at the chance to use it. The link above takes you to my complete review of the service.

They follow the avalanche debt method I wrote about above. For 5 minutes of your time creating an account, you can skip all of the other work and let Ready For Zero do it for you! Of course, you actually have to make the monthly payments!

Balance Transfer Offers: Lastly, below is a search box from Bankrate. You can find deals for credit card balance transfers. Simply click on “Featured Cards” in the drop down box and change it to”Balance Transfer Cards” and click search.

Final Thoughts

I said it before, but it is important to understand: the ultimate goal is to be debt free. Figure out which method will keep you motivated the most to get out of debt and go with that. Don’t over complicate things. Getting out of debt is your #1 priority. Good Luck!

Related

Comments

Good post Jon! I went with the avalanche method, but truth be told 3 of my 4 cards went down to 0 to 1.9% for me and the other held more firm and was at like 10% So, I killed the 10% card first and then went after the other ones. Ultimately though, I think the key point is just paying off the debt and finding whatever works best for you.John @ Wise Dollar recently posted..Success Equals Hard Work

I originally went that way too, but ended up with the snowball method. I may have paid a little more in interest over the course of getting out of debt, but it helped to keep me motivated.Jon recently posted..16 Habits of Wealthy People

I think different things work for different people, but for me I would go with the avalanche method. Paying off a loan at 10% is always better in my mind than a loan at 0%.Michelle recently posted..How To Save Money On a Road Trip

I agree with the idea that whatever strategy for paying down debt works for you is what you should stick with. I’ve always felt that paying down higher interest debt first will save me money over the long run. I’m more concerned with saving money than paying off smaller balances first.Paul @ The Frugal Toad recently posted..I’m Over 50 Do I Need Life Insurance?

We started snowballing our debt a few months ago. Sure, we may pay more interest in the short run but the piece of mind we get from knocking off the little guys really does help us sleep better at night. Our motto is one debt at a time…..Elsa recently posted..Frozen Elsa Costume

One downside to all of these methods is that it takes a fair amount of self discipline to make the payments each month because in order to pay off your debt quickly you have to pay much more than the minimum due each month. Some people don’t have that self discipline…..in those cases they may be better off with a consolidation loan with a monthly payment that they HAVE to make each month to satisfy the terms of the loan.Brock @Cleverdude recently posted..Warning: Inexpensive Adventures Are Hiding In Your Community!

Human behaviour is an interesting thing. When it comes to debt repayment, know thy self is paramount. I agree with the comments above. It’s great to know the options and to pick the one that you know you can get your mind around and stick to.

I agree with Brock above, you should add in a consolidation loan into the mix and show the pros vs cons of that. You could even make a table comparing each of the methods. This would make a great authority post to try and rank in google for traffic.MoneyAhoy recently posted..Book Review – Effortless Savings

When I was paying off my credit cards, I used a combination of the avalance and snowball method. I liked taking care of the small balances and getting them paid off (it was motivating!), then focusing on the higher interest debt. I sort of went back and forth paying off whatever I could, whenever I could and we did take advantage of moving some high interest debt over to a lower interest line of credit.Little House recently posted..Fun, Frugal Summer Savings

I like the snowpacolypse term you created there! I’ve never really had to deal with debt (besides for a mortgage) but I never would have really thought of the balance transfers, that’s a great way to save more money. I would have always approached it the avalanche way, knowing that I might not see progress in the sense of having less number of debts but knowing that in the long term I would be saving on interest.

I also find it strange that I’ve never really heard other people talk about balance transfers when dealing with debt. This is a real eye opener on how I will tell friends to deal with their debt in the future.Zee @ Work To Not Work recently posted..The Revolution Will Be Fabulous

I think balance transfers aren’t talked about a lot because they can be dangerous. Look at me as an example. I went this route and got into more debt. But, once I figured out why I was in debt, I was able to use balance transfers successfully.

Love the snowball method for ability to achieve payoffs. Even though the avalanche method may save a little more money, could be easier to stick to the snowball method because of the constant reinforcement from seeing accounts dropoff.

Great article. I personally prefer the snowball effect method whenever I have to pay off debt. I’ve been fortunate enough to take on very little debt so far, and that has ultimately been the best strategy for me.John Williams recently posted..Lyft Expands With a New Office in Seattle

Either method will do the trick. I went math nerd and did a side by side comparison to see which saves the most money. Avalanche on the surface appears to because the higher rate gets paid first. But I’ve seen cases where Snowball pays off the fastest. All depends upon the balances, minimum payments and rates.

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